A relative of Kach founder Rabbi Meir Kahane was arrested Thursday in connection with the arson attack on a mosque in the village of Yasuf earlier this month.
He was released to his home on bail later Thursday evening, but police were continuing to investigate whether he had anything to do with the attack.
They stressed that the focus of the investigation was still the extreme Right.
The suspect, whose name was not released because he is a minor, was reportedly arrested by undercover police officers while he was traveling with a family member. Several news outlets reported that he is the grandson of Kahane.
Authorities suspected extreme-right wing elements attacked the mosque as a "price tag" for the decision to freeze housing starts in the settlements, and raised concern in Jerusalem that it would trigger violent responses.
Kahane was an MK from 1984 until his party was declared racist and banned from the Knesset in 1988. He was assassinated in New York on November 5, 1990.
In the December 11 incident in the northern West Bank village, assailants burned prayer carpets and holy books, and left behind Hebrew graffiti indicating the rampage was the work of settlers angry over the government's plan to curb settlement construction.
The assailants entered the village before dawn, according to police.
They burned prayer carpets and a book stand with Muslim holy texts, and left graffiti on the floor reading, 'Price tag - greetings from Effi.'
'Price tag' is a term used by settlers either to denote retaliation for government decisions which curb settlement activity or in response to Palestinian attacks.
Clashes erupted between IDF troops and residents of Yasuf following the incident.
Rebecca Baskin and Herb Keinon contributed to this report